December 1996
Volume 2 Number 13
Bank Branches in Supermarkets
Lawrence J. Radecki, John Wenninger, and Daniel K. Orlow
The largest U.S. commercial banks are restructuring their retail operations to reduce the
cost disadvantage resulting from a stagnant deposit base and stiffer competition. As part of
this effort, some banks are opening “supermarket,” or “in-store,” branches: a new type of
banking office within a large retail outlet. An alternative to the traditional bank office, the
supermarket branch enables banks to improve the efficiency of the branch network and offer
greater convenience to customers.
Although the largest U.S. commercial banks have
enjoyed strong earnings in recent years, they are under
considerable pressure to restructure their retail operations. A stagnant deposit base and stiffer competition in
the marketplace for financial services have made the
overhead costs of an extensive branch network increasingly onerous. To cut costs and remain competitive,
these banks are deploying phone centers, introducing
the next generation of automated teller machines
(ATMs), and offering customers the option to bank at
home or the office from a personal computer. These
electronic channels for the delivery of banking services
are making visits to the branch increasingly unnecessary for routine transactions.
As part of their restructuring efforts, commercial
banks are rethinking the concept of a branch office. An
alternative to the traditional office is a scaled-down,
full-service branch located within a large retail outlet,
often called a “supermarket,” or “in-store,” branch.
This new type of office enables banks to improve the
efficiency of the branch network and realize savings
from their investment in phone centers and ATMs.1
According to industry analysts, about 3,500 supermarket branches are now in operation out of a total of
50,000 commercial bank branch offices.2 Some of the
largest bank holding companies have taken the lead
in introducing supermarket branches (see table).
Moreover, supermarket branches will become increasingly common in the next two to three years as several
large banks carry out their announced plans to open
hundreds more such offices.
In this edition of Current Issues, we describe the
operational and strategic considerations that have
prompted banks to use this new branch design, including the potential to reduce costs and expand customer
bases. We then review some relevant policy issues that
emerge from this new and growing approach to retail
banking.3
Banks’ Cost Disadvantage
Banks’ declining role as holders of household savings
has resulted in a high cost structure for their branch
operations. After rising to a peak of 38 percent at yearend 1974, deposits at banks, thrifts, and credit
unions—measured as a share of the household sector’s
financial wealth—have fallen by a little more than half,
to 17 percent at year-end 1995 (see chart).
The costs of a typical branch office can be used to
illustrate how a static deposit base creates a competitive disadvantage for banks relative to other financial
intermediaries. A typical branch has total annual direct
expenses on the order of $700,000, of which the largest
CURRENT ISSUES IN ECONOMICS AND FINANCE
Leading Banks in Supermarket Branching
as of June 30, 1995
Bank Holding Company
BankAmerica
Corporation
Wells Fargo
& Company
Fifth Third
Bancorp
BancOne
Corporation
NationsBank
Corporation
National Commerce
Bancorp
Mellon Bank
Corporation
National City
Corporation
Bank of Tokyo
Zions Bancorp
Number of
Supermarket
Branchesa
Supermarket Branches
as a Percentage
of the Bank’s
Total Branches
126
6.1
88
4.6
82
16.9
71
4.5
68
3.1
47
58.0
35
7.9
29
27
25
3.1
9.5
19.1
tage. If a bank had a larger pool of deposits over which
to spread its fixed expenses, the cost of the branch system would be proportionately less burdensome.
Banks have tried to reduce their cost disadvantage
by identifying and reducing inefficiencies in their retail
operations. For instance, branch managers track the
volume of teller-window transactions at each office by
day of the month, day of the week, and hour of the day.
The anticipated volume of customer traffic is used to
set schedules for full- and part-time teller staff at each
branch location. Retail management indicates, however,
that it has squeezed out nearly all the costs it can from
the existing system while still providing a high level of
customer service.7
Supermarket Branches
To cut costs, expand market share, and offer customers
greater convenience, banks are testing new designs and
locations for their branches. One new type of branch
office is a supermarket, or in-store, branch—a full-service office operating in leased space, usually located
within a giant supermarket of 50,000 or more square
feet attracting 15,000 or more shoppers each week. For
the convenience of bank customers, it is open seven
days a week and most evenings, like the supermarket.
Source: SNL Branch Migration DataSource, version 1.5.
aIncludes
branches with zero deposits.
component is staff compensation (for twelve or so fulltime-equivalent employees).4 The cost of the building
itself represents the next largest component of these
total direct expenses, and the remainder comprises such
items as electricity, supplies, and property maintenance. On top of direct expenses are indirect operating
expenses, incurred by the head office or other centralized functions for such items as computing, preparation
and mailing of monthly statements, and advertising.
These indirect expenses are roughly equal to direct
expenses, bringing the total annual operating expenses
of a branch to $1.4 million.5
An in-store branch occupies 400 to 600 square feet,
compared with a traditional branch’s 5,000. A typical
unit is located near the store entrance or checkout lanes
and features two teller windows, two stations at a
counter to open accounts, one or two ATMs, and direct
connections to the phone center. It often has a single
office to hold private consultations. Some banks also
equip their in-store branches with high-tech devices
such as a video phone or an automated loan machine.
Supermarket branches can be built and installed at a
comparatively low cost—$200,000 to $300,000, or
one-fifth the cost of setting up a conventional branch.
About $60,000 to $100,000 of this amount covers construction costs, and the remainder is for equipment,
most of which can be removed and reinstalled elsewhere. Hence, only the construction costs represent a
sunk expense. The operating expenses are estimated to
be $350,000 annually, compared with $700,000 or more
for a traditional branch, even though the supermarket
branch is open many more hours each week. A supermarket branch can therefore attain the same level of
profitability as a conventional branch with slightly less
than half the account and deposit volumes.
The dollar volume of deposits at a typical branch is
about $50 million, over which the $1.4 million of noninterest expenses must be spread. In percentage terms,
annual operating or noninterest expenses therefore
equal 2.8 percentage points of deposits. To cover these
costs, a margin of 280 basis points must be maintained
between interest expense and interest earnings, less
noninterest revenue received from account fees and
other charges. 6 In contrast, a typical money market
mutual fund, a close substitute for a savings deposit,
has an expense ratio of around 50 basis points. Thus, a
bank’s cost disadvantage here is substantial and could
be as much as 200 basis points. Similarly, a short-term
bond mutual fund, a possible substitute for a time
deposit, has an expense ratio of 80 to 100 basis points,
but also a higher expected rate of return. Again, a bank
appears to be working under a serious cost disadvan-
FRBNY
Selling and Staffing. The foot-traffic passing
through the supermarket is a critical element of what
makes an in-store branch work. Members of a broad
cross-section of households residing within six miles of
a large suburban supermarket come in to shop two or
2
and new accounts, management uses compensation
packages that include commissions or bonuses linked
to individual or branch performance.
three times a week. Frequent shopping trips thus create
opportunities for a bank to open accounts with and
offer services to individuals who would otherwise not
enter one of its traditional branches. Opportunities also
arise to sell additional services to existing customers,
who typically visit a supermarket more often than a
In addition to providing more selling opportunities,
supermarket branches offer greater operational efficiencies. For example, in-store branches are less expensive
to operate in part because they use fewer employees—
about six full-time equivalents in contrast to twelve at a
conventional branch. Staff members cover for each
other and are largely interchangeable. This flexibility is
necessary because at many times only two employees
will be working at the branch. Consequently, there is no
sharp division of tasks among tellers, platform personnel, and branch management. Moreover, the branch
manager typically has less management responsibility
and a smaller range of duties than at a traditional
branch. As a result, there is essentially one job at a
supermarket branch.
Supermarket branches can be built and
installed at a comparatively low cost—one-fifth
the cost of setting up a conventional branch.
conventional branch. To take full advantage of these
opportunities, branch staff will circulate through the
store in order to win new accounts and sell banking
products.
Strategic Considerations. The supermarket and the
bank see in-store branches as mutually beneficial. The
supermarket chain expects increased sales as more of
the bank’s customers choose to shop at a store housing
a branch: the greater the bank’s market share in the
region served by the supermarket chain, the larger the
potential boost to sales. The revenue received from
renting space to the bank is usually viewed as somewhat incidental. From its side of the alliance, the bank
expects to gain from the supermarket’s flow of shoppers. Banks seek out chains that have a high proportion
of super-size stores: the larger the store, the greater the
flow of potential bank customers.
Banks realize that they must develop a more salesoriented culture among their staff if the in-store
branches are to succeed. To find employees who thrive
on customer contact, personnel departments are reportedly adjusting their search procedures and increasingly
emphasizing a background in retail sales and customer
relations. To sustain the staff ’s efforts to generate sales
Distribution of Total Financial Assets Held
by the Household Sector
1952-95
Cumulative percentage
100
The supermarket-bank alliances tend to be exclusive
within a state or metropolitan area. The supermarket
chain prefers a single large bank to put branches in its
stores because negotiating with one bank is much simpler than negotiating with several, and the chain can
more effectively promote the addition of a single partner’s branches at all its locations. The bank, in turn, is
looking for a supermarket chain with a presence
throughout a marketing area so that it too can more
efficiently advertise the combination. As a result,
agreements between the largest players in a geographic
area—both supermarket chains and banks—are becoming somewhat common.
Pension fund reserves
80
Other
60
Corporate equity
Mutual fund shares
40
Credit market instruments
38.2
20
0
1952 55
Deposits
60
65
70
75
80
85
90
95
Supermarket branching can be used by banks as both
an offensive and a defensive strategy. On the offensive
side, a bank opening in-store branches can enter a market or expand at relatively low cost. In-store branching
can also serve as a defensive strategy because only a
very limited number of large supermarket chains operate in any one state or metropolitan area. By forming an
exclusive arrangement with one chain, a bank may hinder local competitors and potential out-of-state entrants
Source: Board of Governors of the Federal Reserve System, Flow of Funds
Accounts.
Notes: The chart reports fourth-quarter data for each year. For the percentage
share of deposits, the numerator is the sum of demand, savings, and time deposits
at commercial banks, thrifts, and credit unions, plus currency in the hands of the
household sector; the denominator is the total financial assets of the household
sector less equity in unincorporated business and security credit. The household
sector includes nonprofit organizations. “Other” includes life insurance reserves,
investments in bank personal trusts, equity in unincorporated business and
security credit, and miscellaneous assets.
3
CURRENT ISSUES IN ECONOMICS AND FINANCE
from following the same low-cost strategy for penetrating a market area on a large scale.
in the banking industry could eventually tilt toward
larger institutions.
Banking Kiosks. In addition to opening fullservice, in-store branches, banks are installing limitedservice kiosks inside supermarkets and giant discount
stores. A kiosk, occupying less than 100 square feet of
space, consists of one or two ATMs, a dedicated connection to the phone center, and occasionally some
other self-service device, but it has no teller window.
During peak shopping hours, the kiosk is staffed by one
or two employees, who spend much of their time circulating among shoppers to provide information and
assist in the opening of new accounts. Some large retail
banks will soon have numerous kiosks in place to supplement their network of full-service, in-store
branches. Kiosks are often installed in the smaller
supermarkets that do not generate the shopper flows
necessary to sustain a true in-store branch. This practice allows both partners to promote the bank’s presence, in the form of either a full- or a limited-service
location, at every store in the chain.
The shift to supermarket branches also raises a number of more immediate issues, including the effects on
competition and the public’s access to financial services.
The Effects on Competition. As part of its assessment of the effects of proposed mergers and acquisitions on competition, the Federal Reserve calculates an
index of market concentration (the HerfindahlHirschman Index, or HHI) for each geographical market in which the combining banks operate. A higher
HHI suggests a less competitive market. The competitive effects of a proposed merger that produces a high
value of the HHI or increases the HHI significantly are
subject to careful analysis by the Federal Reserve.8
In principle, the popularization of supermarket
branching should make markets more competitive for
any given value of the HHI (Neill and Danforth 1996).
The lower cost structure of an in-store branch implies a
lower barrier to entry or expansion. The heightened
threat of entry or expansion by other banks should
encourage the banks already serving a market to behave
more competitively.
Kiosks, which go by names such as express centers,
express branches, or in-store sales kiosks, are classified
by the banking agencies as off-site ATM locations; they
Banks are, in fact, using the new lower cost branch
design to increase the density of their branch networks
and expand their geographical reach. For example,
People’s Bank, most of whose branch offices are
located in Fairfield County, Connecticut, has
announced plans in alliance with the Stop & Shop chain
to open forty-five in-store branches during a two-anda-half-year period in all parts of the state, including
those counties where it does not currently have a presence (People’s Bank 1996). This expansion would tend
to increase competition both in areas in which People’s
Bank is already operating, as rival banks strive to maintain market share, and in those areas it is entering,
where the HHI should fall as a result of its entry.
Banks are . . . using the new lower
cost branch design to increase the density
of their branch networks and expand their
geographical reach.
are not officially considered to be branches. Press
reports, however, often refer to them as supermarket
branches, failing to distinguish them from full-service
locations.
Another example of this strategy is BankAmerica’s
long-distance de novo entry into Chicago. By forming
an alliance with Jewel-Osco, the largest supermarket
chain in metropolitan Chicago, BankAmerica will open
fifty supermarket branches before year-end 1996
(American Banker 1996). The large-scale entry of
BankAmerica would also be expected to cause the HHI
to fall and the level of competition to rise in the
Chicago market.
Policy Issues
The advent of supermarket branches raises several
issues, some theoretical or long-run in nature, others
more practical and immediate. Among the long-run
issues is the impact this new type of branch office will
have on the economies of scale, scope, and distribution
in retail banking. The switch to lower cost, in-store
branches raises efficiency, which should benefit bank
customers. At the same time, the new type of branch
office and the alliances with the largest supermarket
chains together imply a shift in a bank’s cost structure
and possibly an increase in the size of a bank necessary
to achieve the greatest cost efficiency now attainable. If
such a shift were to occur as supermarket branching
gains in popularity, the size distribution of institutions
In the longer run, however, increases in the level of
competition in local banking markets brought about by
supermarket branching may not be sustained. For
example, if the two or three largest banks in a particular
area open a large number of supermarket branches and
their deposit shares increase proportionately with the
4
FRBNY
expansion of their branch networks, the resulting
increase in retail deposit concentration in the local market could eventually lead to a higher HHI and subdued
competition.
banks are attempting to reduce costs and afford greater
convenience to their household customers. This
approach offers potential benefits to both the bank and
the supermarket chain in the form of increased customer traffic and joint promotions. At the same time,
supermarket branching raises important public policy
issues, such as those concerning its effects on competition in local banking markets and on the public’s access
to banking services.
Moreover, local markets could even become much
more concentrated over time. If the new type of branch
office proves to be cost-effective and popular with the
public, smaller banks may lose deposits and see average
deposits per branch fall below their break-even point.
The profitability of these smaller banks may decline
enough to convince them to exit the industry, a development that could result in more concentrated and less
competitive markets. Furthermore, by allying with the
two or three dominant supermarket chains in an area,
the largest banks could prevent potential competition
from expanding through the in-store branch strategy.
Endnotes
1. Orlow, Radecki, and Wenninger (1996) discuss in detail the
movement to electronic delivery channels for retail banking services and how it is integrated strategically with the introduction of
supermarket branches.
2. The data collected by the banking agencies do not distinguish instore branches from traditional branches.
Meeting the Public’s Need for Banking Services.
In evaluating merger and acquisition applications, the
Federal Reserve considers how well the public’s banking needs are being met. As part of the review process,
it seeks comments from residents of the communities
that the applying banks serve. In fact, community representatives have opposed several proposed mergers in
recent years on the grounds that prospective branch
office closings would seriously reduce the availability
of banking services to residents of certain low- and
moderate-income communities.
3. Our discussion of supermarket branches is from the perspective
of broad industry trends. Many individual institutions will not, of
course, follow the general patterns.
4. Much of the information on in-store branches was obtained at an
industry conference on “Advances in Supermarket Branching” held
on April 24-26, 1996, in Chicago. In-store branching has also been
the subject of numerous articles in the American Banker during the
past few years.
5. The costs of branch operations cannot be allocated precisely
because most of a bank’s noninterest expenses are shared by two or
more units.
The switch to supermarket branches and kiosks is a
development that could help maintain or even increase
the availability of banking services in these communities. Supermarket branches reduce a bank’s fixed and
operating costs substantially. A bank may therefore be
willing to operate in-store branches and kiosks in those
areas that could not sustain a traditional branch. A
potential stumbling block, however, is the shortage of
large supermarkets in urban areas. Hence, in deciding
whether to offer tax incentives, zoning variances, or
other inducements to attract large supermarkets to lowand moderate-income areas, local governments may
also wish to consider the opportunities that these large
retail outlets offer to increase the availability of banking
services.
6. Most estimates of the total expenses of branch operations fall in
the range of 200 to 300 basis points. The variance seems to be attributable to differences in operational efficiency and cost-accounting
methodology. It is unclear whether each estimate captures all direct
and indirect expenses attributable to branch operations.
7. The public disclosure of results by line of business in 1995
annual reports indicates that, among the few banks that specifically
break them out, branch-based operations are not particularly profitable, in some cases earning a lower return on equity than other
major segments such as corporate banking and national consumer
finance.
8. The calculation of the HHI involves three steps: obtaining the
percentage shares of total deposits in the market held by each bank
(or bank holding company), squaring these numbers, and summing
the results. For example, a market served by five banks, each with a
20 percent share of total deposits, would have an HHI value of (5) x
(20)2, or 2000. The Federal Reserve reviews the competitive effects
of proposed mergers that produce a value of the HHI greater than
1800 or increase the HHI by more than 200 points. See Jayaratne
and Hall (1996) for more information on the HHI.
Conclusion
In restructuring their retail operations, many large commercial banks are adopting a promising new design for
a branch office: the supermarket, or in-store, branch.
By opening scaled-down branches in retail outlets,
5
FRBNY
CURRENT ISSUES IN ECONOMICS AND FINANCE
References
American Banker. 1996. “B of A Blitz to Put 50 Banks in Chicago
Groceries.” July 26.
Jayaratne, Jith, and Christine Hall. 1996. “Consolidation and
Competition in Second District Banking Markets.” Federal
Reserve Bank of New York Current Issues in Economics and
Finance 2, no. 8 (July).
Neill, Daniel S., and John P. Danforth. 1996. “Bank Merger Impact
on Small Business Services Is Changing.” Banking Policy
Report 15, no. 8 (April 15).
Orlow, Daniel K., Lawrence J. Radecki, and John Wenninger. 1996.
“Ongoing Restructuring of Retail Banking.” Federal Reserve
Bank of New York Research Paper no. 9634.
People’s Bank. 1996. 1995 Annual Report.
About the Authors
Lawrence J. Radecki is an assistant vice president in the Banking Studies Function of the Research and
Market Analysis Group; John Wenninger is an assistant vice president in the Group’s Payments Studies
Function; Daniel K. Orlow, formerly a financial analyst in the Payments Studies Function, is now a financial analyst in the Markets Group.
The views expressed in this article are those of the authors and do not necessarily reflect the position of
the Federal Reserve Bank of New York or the Federal Reserve System.
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